Most of the major global equity markets ended the day higher yesterday, as they looked past the IMF recession warning and the Q1 profit decline at JPMorgan and Wells Fargo and focused on the slowing coronavirus infection rate and the potential lifting of the lockdowns. The UK’s FTSE-100 was the notable exception, which was dragged down by the oil heavyweights BP and Royal Dutch Shell as the oil price moved lower after the underwhelming OPEC/Russian production cuts we talked about yesterday (please see here)
As expected, the IMF’s World Economic Outlook painted an ugly picture, predicting the “Great Lockdown” recession would be the steepest since the great depression in the 1930s, with the global economy declining 3% in 2020 (the global economy shrank 0.1% during the 2008/9 global financial crisis). In the IMF’s last forecast in January, it estimated that the global economy would grow by 3.3% in 2020.
However, as we have been saying ad-nauseam in our daily updates, this is not like a normal economic downturn as the coronavirus outbreak is a transient issue. As such, we are maintaining our view that while it will be a sharp and painful downturn, it will also be relatively short, with a sharp acceleration on the other side – i.e. a V-shaped economic hit and recovery, thanks to the coordinated stimulus measures that governments and central banks have provided.
Both JPMorgan and Wells Fargo set aside massive bad-debt provisions to cover defaults. While their results should provide a sense of how bad it could be, for example, JPMorgan increased its provision for bad-debts to $8.29bn (which compares to the $1.5bn this time last year and its record $8.6bn provision during the 2008/9 global financial crisis), it is worth highlighting that banks were slow to make provisions during 2008/9, so this could simply be the banks ‘kitchen sinking’ in an attempt to get ahead of the curve in order to avoid any criticism this time around. Additionally, these provisions could be next year’s profits if these bad-debt losses don’t fully materialise!
Consequently, it will be interesting to see the bad-debt provisions and accompanying statements from Bank of America, Citigroup and Goldman Sachs which report later today, and Morgan Stanley tomorrow.
It is obvious that this quarter’s reporting season will be very uncertain and cautious (given no-one knows how long the lockdowns will continue), and that 2020 is likely to be a very poor year for company sales and profitability, but rather than focusing on this year’s profitability or the IMF statement, as we all know the current situation is dire, instead we need to focus on what really matters: the easing of the coronavirus outbreak and the associated lockdowns; how well-placed companies are to benefit from the rebound that we will see towards the end of this year; and as a consequence what their 2021 profitability will be. This, coupled with any “not so bad” news, will be enough to ensure equity markets continue their recovery.
Investment Management Team